Editorial 1 : A new kind of green
Introduction: India is in the midst of a significant energy transition. The decision makers would be wise to create a new strategic framework for energy policy and its implementation.
India's Dual-Pronged Energy Policy
- Focus on Fossil Fuels:
- Manage and reduce import dependence on petroleum.
- Strategies include:
- Diversifying import sources.
- Building strategic oil reserves.
- Increasing domestic exploration.
- Promoting energy demand conservation and efficiency.
- Ensuring environmental protection.
- Accelerating Transition to Clean Energy:
- Long-term goal: Achieve net zero carbon emissions by 2070.
- Short/medium-term objectives:
- Reduce carbon intensity of GDP.
- Generate 500 GW of electricity from non-fossil fuels by 2030.
- Implementation:
- Ministry of Petroleum handles the fossil fuel prong.
- Ministry of Coal plays a significant role due to coal's dominance.
- The clean energy prong involves multiple ministries:
- Primarily: Renewables and Power.
- Additionally: Heavy Industry, Mines and Minerals, IT and Information, and Environment. This reflects the diverse aspects of building a green energy infrastructure.
Challenges of India's Fragmented Energy Policy
- Fragmented Decision Making:
- Each energy ministry operates independently with limited collaboration.
- Lack of a central forum hinders integrated energy policy discussions.
- Difficulties in Achieving Sustainability Goals:
- Siloed decision making makes it hard to view the energy value chain holistically.
- International forces add complexity to the green transition.
- Impact of Geopolitical Competition:
- New Cold War creates challenges for green energy on three fronts:
- Supply Chain Resilience: China dominates green tech materials and manufacturing, raising security concerns.
- Domestic Investment: National security considerations necessitate domestic green technology development.
- National Security: Reliance on foreign suppliers could become a vulnerability.
- Government's Response:
- Introduced import duties on Chinese products.
- Implemented PLI scheme to incentivize domestic manufacturing.
- Need for a Unified Approach:
- Develop a strategic framework similar to the US Chips and Science Act.
- Create a comprehensive "Energy Strategy" document for policy convergence.
- Aim: Integrate fossil fuel and green energy policies into a single, cohesive strategy.
Proposed "Energy Strategy" Document: Key Issues
- Optimizing Public Sector Enterprises (PSEs):
- Address overlap between hydrocarbon PSEs and other energy companies.
- Aim to prevent duplication of effort and resources.
- Securing Critical Materials:
- Respond to International Energy Agency (IEA) warnings on supply shortages for copper, lithium, nickel, and cobalt.
- Develop a clear strategy to meet India's future critical material needs.
- Balancing Clean Energy Competitiveness:
- Analyse the impact of the "China factor" on:
- Clean energy competitiveness against fossil fuels.
- Access to affordable green technology.
- Consider potential consequences of US and EU anti-dumping measures on Chinese EVs.
- National security concerns vs. economic implications.
- Attracting Private Investment:
- Address boardroom risk aversion hindering green investments.
- Identify strategies to incentivize private capital participation:
- Targeted incentives for specific sectors or activities.
- Increased public investment to "crowd in" private capital.
- Detail these options and roadmap within the energy strategy document.
Conclusion: India’s energy sector is on a cusp. Fossil fuels will dominate it for decades more, but the overriding priority is to reduce its share. The next government’s challenge is to accelerate the latter against the backdrop of a polarised international geopolitical context and exponential technological innovation.
Editorial 2 : What GDP numbers say
Introduction: India’s GDP data was keenly awaited, coming on the back of sovereign rating outlook upgrade by S&P and just days before the union election results are out. Indeed, it has surpassed market expectations, with a growth of 8.2 per cent in 2023-24 as against 7 per cent in 2022-23. While overall GDP growth is impressive, it is important to understand some of the nuances of the data to infer the sustainability of the growth this year.
Reason for diversion between GDP and GVA growth rates
- While the fourth quarter growth has been strong at 7.8 per cent, there has been upward revision in the previous quarter numbers and that has strongly propped up the overall GDP growth for the year.
- Another important point is the sharp divergence of 1 percentage point between GDP and GVA growth in 2023-24 as against 0.3 percentage point in 2022-23.
- This is mainly because of sharp growth in net taxes (due to higher tax collection and lower subsidies).
- This has also aided in pushing up the GDP growth.
Sector wise breakup of GPD growth data
- Overall agriculture value added growth has been muted, given the poor monsoon last year.
- Supported by lower input prices, manufacturing GVA has shown a healthy recovery, with growth of 9.9 per cent in 2023-24 (as against contraction in 2022-23).
- While services sector growth has been healthy at 7.6 per cent, there has been some moderation in the fourth quarter.
- There has specifically been a moderation in the segment of trade, hotel, transportation, and communication after strong growth in 2022-23.
- The construction sector has remained robust, recording a growth of 9.9 per cent in 2023-24.
The expenditure part of GDP growth
- Overall GDP growth is not very broad-based from expenditure side.
- Private consumption, the main pillar of the economy, has grown by a feeble 3.8 per cent in 2023-24.
- This is the slowest consumption growth rate in the last two decades (excluding the pandemic year contraction).
- Investment, the other pillar of the Indian economy, has grown by a healthy 9 per cent. Investment in the economy has been mainly led by the government sector.
- Central government’s capex has grown by a healthy 28 per cent in 2023-24, while aggregate state capex (for 19 major states) has grown by around 33 per cent in April-February.
- While the private sector is showing signs of recovery, a strong broad-based recovery in the private capex cycle is yet to be seen.
Exports’ contribution in the GDP growth
- Exports, the third pillar of India’s economy, have been muted due to weak global growth.
- While India’s services exports have remained healthy, merchandise exports specifically felt the pinch of global slowdown.
Going forward, India's GDP growth is expected to moderate
- Growth to remain healthy: Estimates suggest growth will be around 7% this year.
- Private consumption key for sustained momentum:
- Higher income bracket spending continues, but lower income remains cautious.
- High inflation and low wage growth dampen spending in lower income groups.
- Weak rural demand due to poor monsoon in 2023.
- Signs of improvement in rural demand:
- Healthy growth in two-wheeler sales.
- Recovery in FMCG sales volume in rural areas (as per Nielsen data).
- Factors crucial for sustained rural demand recovery:
- Spatial and temporal distribution of rainfall (widespread and timely rains).
- Moderation in food inflation.
- Improvement in the employment scenario, especially in the unorganised sector.
- Employment data shows mixed signals:
- Improvement in net EPFO enrolment in H2 2023-24 (positive sign).
- Poor hiring by the IT sector, a major job provider, remains a concern.
A Pick-up in Private Capex Crucial for Sustained Growth
- Capacity utilization in manufacturing well-positioned for capex revival: Levels at 75%, close to the long-term average.
- Strong financial health supports investment: Banks and corporate balance sheets are in good shape.
- Positive signs for private investment: CMIE data shows an increase in announced investment projects.
- Key drivers for sustained capex pick-up: Policy certainty and Confidence in global and domestic economic stability.
- Consumption revival most critical factor: A sustained increase in consumer demand is essential for a significant rise in private investment.
Global Developments to Watch
- Positive impact: Improving global growth outlook could boost India's exports.
- Negative risks:
- Geopolitical tensions could cause supply disruptions.
- Rising global commodity prices, especially industrial metals, could increase input costs for Indian businesses.
- Further escalation of US-China trade tensions or worsening global debt issues could negatively impact the global economy, with ripple effects for India.
In a nutshell
India's Economic Outlook: Challenges and Opportunities for the New Government
- Impressive growth, but sustainability concerns: India's economy has grown well, but needs quick action to ensure it lasts.
- New government's priorities:
- Maintain high economic growth.
- Achieve fiscal consolidation (reduce budget deficit).
- Key challenges:
- Reviving broad-based consumption, especially among lower income groups.
- Continuing the focus on infrastructure investment (capex) led recovery.
- Increasing job creation in both urban and rural areas.
- Strategies for sustained growth:
- Policies promoting sustained consumption growth.
- High government spending on infrastructure will encourage private investment.
- Focus on lower income: Ensure benefits of growth reach the lower income categories for long-term stability.
Conclusion: India’s GDP growth is impressive, but we need to sustain it. For that to happen, it will be important for the new government to ensure that the benefits of high growth trickle down to the lower income categories.